December 5, 2018
Man this year has been filled with sleaze-based bankruptcy filings: we’re old enough to remember when The Weinstein Company may have taken the prize for filth. Now, this.
Earlier this week, on December 5th, USA Gymnastics (“USAG”) filed for bankruptcy in the Southern District of Indiana. The bankruptcy filing reminds us that in a coverage universe of companies that file for bankruptcy because of (i) various operational reasons (e.g., declining revenues due to supply chain interruptions, poor inventory management, sky high SG&A, etc.) and (ii) balance sheet reasons (e.g., too much debt, interest expense, and covenant compliance obligations), there are good ol’ fashion litigation-induced bankruptcy filings.
USAG is a 501(c)(3) Indianapolis-based not-for-profit with a focus on six athletic disciplines: women’s gymnastis, men’s gymnastics, trampoline and tumbling, rhythmic gymnastics, acrobatic gymnastics, and group gymnastics. Think of it like a platform (no pun intended): the USAG brings coaches, judges and competitors together for education and competitions throughout the United States. Indeed, the USAG sanctions approximately 4k competitions and has more than 200k members.
In 1988, the USAG formed a separate (non-debtor) entity, The National Gymnastics Foundation, to further the Olympic sport of gymnastics. Thereafter, the United States Olympic Committee (“USOC”) and the Fédération Internationale de Gymnastique designated the USAG as the “national governing body for the sport of gymnastics in the United States.” That designation is now at risk. Why? Enter sleaze here…
Per the Company:
As a result of the misconduct of Larry Nassar, a former volunteer physician to USAG, USAG has been named as a defendant in approximately 100 lawsuits brought by survivors of Nassar’s abuse. USAG’s first priority is to ensure that these survivors are treated fairly and respectfully. The survivors’ claims, in the aggregate, may exceed the available resources of USAG. USAG submits that this Court is the best forum in which to implement appropriate procedures to equitably determine the rights to and allocate recoveries to survivors who have asserted claims against USAG. USAG remains committed to its mission of supporting athletes, and will continue to take specific and concrete steps to promote athlete safety and prevent future abuse.
Nassar was a volunteer medical provider who later faced accusations of sexual misconduct; Nassar ultimately pled guilty to sexual assault and other crimes and will spend his life in prison.
USAG has no secured debt and virtually no unsecured debt — other than the contingent liabilities arising out of the aforementioned lawsuits/claims. Hundreds of individuals have asserted claims in various states against USAG. USAG estimates the potential impact of these suits to be between $75-$150mm. On the asset side of the balance sheet, the company has an operating lease, $6.5mm of cash/equivalents/investments and its insurance policies. And that last piece is where the rubber meets the road. Per the Company:
USAG has insurance coverage encompassing numerous policies covering approximately 30 years, which I expect will provide substantial coverage for the amounts asserted in the various lawsuits and claims. Nevertheless, I understand that the applicable insurance proceeds may be insufficient to cover allowed claims of survivors against USAG. For this reason, USAG filed this chapter 11 case to establish an orderly procedure for the allocation of its insurance proceeds.
The company intends to use the “breathing spell” afforded by Bankruptcy Code section 362’s “automatic stay” (read: an injunction, basically) to (i) establish a process by which insurance proceeds may be doled out to claimants and (ii) assure the USOC and athletes that the USAG is positioned to be the national governing body for gymnastics going forward.
Our two cents? They should definitely consider a rebranding exercise.
Jurisdiction: S.D. of Indiana (Judge Moberly)
Capital Structure: $mm debt
Legal: Jenner & Block (Melissa Root, Catherine Steege, Dean Panos)
Claims Agent: Omni Management Group Inc. (*click on company name above for free docket access)